Factors to consider before investing in real estate
The appreciation of real estate over time has long made owning a home or an investment property a sound financial strategy.
Prospective homebuyers spend considerable time looking for a property they hope to call home. Various factors, including property taxes and the reputation of local schools, may be considered as homeowners decide where to look for a new home. That vetting process is equally important, albeit slightly different, when buyers are considering investing in properties they do not intend to live in.
Real estate can be a great way to diversify an investment portfolio and earn extra income. Before shopping for an investment property, novice investors may want to consider certain factors to determine if real estate is the best investment vehicle for them.
Rental potential and the local labor force
Location is a significant factor to consider when investing in real estate, but recent shifts in how and where people work could change the real-estate-investment landscape. A 2020 Gartner Inc. survey of more than 300 financial executives and leaders in the finance industry found that roughly 25 percent will move at least one out of every five of their on-site workers to permanently remote positions in the years ahead. Economists note that this shift to remote working could be among the more lasting trends to emerge from the pandemic. Before investing in real estate, prospective investors should examine local trends to see if more and more locals are working remotely, and whether or not that is affecting the market for rentals.
To flip or not to flip
Flipping properties gained popularity in the second decade of this century, but figures from the property database curator ATTOM Data Solutions indicates that returns on investments in flipped properties declined for the third straight year in 2020. Though flipping can still yield a strong return, investors may not realize the returns on flipped properties that they might have realized as recently as five years ago. Potential investors should conduct some research regarding real estate market trends, including flipping data, where available, to make the most informed decision possible.
Condition of the property
Product shortages were another trend to emerge during the pandemic, and disruptions to the supply chain will not necessarily go away any time soon. In addition, the cost of various products associated with home improvements, including lumber, skyrocketed during the pandemic. The National Association of Home Builders noted that while lumber prices declined in 2021, the price of lumber packages quoted to builders remained high. That means real estate investors who invest in properties that will need work could be forced to pay a lot to fix these properties, and ongoing supply-chain issues could extend the time it takes to renovate a property. Investors must be able to bear these costs and lag times to make the most off their real estate investments.
Investment properties can be a great way to diversify a portfolio. Potential investors must consider a host of factors to determine if real estate is an investment they want to make.